What’s Next for Dynegy?

By Deal Journal

Ronald Barusch spent more than 30 years as an M&A practitioner at Skadden, Arps, Slate, Meagher & Flom LLP before retiring this year. He is no longer affiliated with the firm and the views expressed here are his own.

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By Ronald Barusch

Dynegy lost the shareholder vote on the Blackstone deal, and suddenly the company has become kinder, gentler and more confident. Dynegy is kicking off an “open strategic alternatives process.” So, if you’ve got a hankering to buy Dynegy or have any other ideas, send them a note, won’t you?

Bloomberg News

Steve Schwarzman’s Blackstone Group walked away from a Dynegy buyout. Now what?

Dynegy has tussled for weeks against Seneca Capital over the merits of a proposed sale to Blackstone. Now, Dynegy said it “will engage” with Seneca to find a “qualified, independent candidate” for “immediate appointment” to the board. This comes even though Dynegy has spent the last six weeks questioning Seneca’s motives.

Finally, Dynegy has adopted one of the most palatable poison pills ever manufactured. It will expire at the 2011 annual meeting unless shareholders approve it, and the pill permits any fully financed offer for all of the company’s shares at a price of $5.00 or more.

What is really going on?

The Dynegy board has a bit of a problem on its hands. It lost the shareholder vote on the Blackstone deal after pulling out the scare tactics crusade in which Dynegy management basically said that the company was a basket case and $4.50 (later $5) per share was the best Dynegy shareholders could hope for. Seneca countered by saying that there was much more value there. With the Blackstone acquisition now on the scrap heap, which vision would you choose now if you’re a Dynegy shareholder?

Last week Seneca filed its preliminary proxy statement seeking to oust two Dynegy directors (including its CEO) and replace them with independent candidates selected by Seneca. The SEC waiting period for that filing expires in just two days. If Seneca replaces those two directors, it will not change control of Dynegy, but Seneca has another two board candidates standing by who would. Seneca’s problem with the grab for complete control is that if it gains a board majority in a fight, it will trigger Dynegy management’s golden parachutes and the change of control provisions in Dynegy’s revolving credit agreement.

Instead, Seneca is crossing its fingers that once the existing beleaguered directors are defeated again, the remaining directors will see the errors of their ways, and an additional two directors will resign, handing Seneca’s candidates the keys without triggering the change of control provisions. (Don’t count on this happening—it is hard to believe Seneca is.)

Dynegy is saying to Seneca, in essence, “instead of fighting to boot off two directors, we’ll expand the board and give you one seat for no further effort, and we will establish a strategic review committee.” And although Dynegy didn’t say so, you can be sure management will be willing to pay Seneca’s fees for its fight so far– if Seneca compromises.

Bloomberg News

You might think that Seneca and Icahn are in the driver’s seat. Seneca undoubtedly has some pretty ugly facts up its sleeve to throw at Dynegy. It is going to say that the current board has spent a lot of the shareholders’ money on a losing deal with Blackstone.

On top of Dynegy’s own fees in the deal, Blackstone is slated to recoup up to $10 million of its expenses as a result of the rejection from Dynegy shareholders—that was in the original deal–PLUS another $16.3 million– which Dynegy agreed to just last week– contingent on another deal cropping up.

Seneca also claims management will receive an incremental amount of almost $32 million for their own pockets if a deal is closed—unless of course Seneca can get them fired them before triggering that payment.

But Seneca and Icahn also have a bit of a problem.

In the fight to defeat the Blackstone transaction, they said they were interested in being a buyer. That potentially puts them on the other side of the negotiating table from the Board and other shareholders of Dynegy. Dynegy management can say: Don’t give the keys to Seneca because we can get a higher price for you from Seneca and Icahn.

And despite the general palatability of the poison pill, it the pill does weaken Seneca and Icahn: it effectively puts limits on Icahn’s and Seneca’s ability to work together in taking over Dynegy without prior Board approval.

Thus, if there is no settlement, look for lots of additional nastiness. But will Seneca settle with Dynegy? We do not know what Dynegy’s bottom line offer will be since today’s release was probably an opening offer.

But here is my guess: if Seneca is willing to stop fighting the golden parachutes, Dynegy could be quite flexible.

Comments (3 of 3)

I bought in 2001 at $30 and have been sitting on big losses for years. There is value in this company but this pathetic senior management team have proved unable to realize it. I agree that their prime objective is a big payout for themselves and not an increase in shareholder wealth. My blood boils at the prospect of these guys walking off with golden parachutes. In my view, the Seneca and Ichan teams could not possibly do worse than current management so I will vote with Seneca and Ichan.

1:25 am November 24, 2010

Anonymous wrote :

Bruce true it is sad. Icahn is also only interested in making profit as well- shareholders could lose more by following him.

12:02 am November 24, 2010

Fire Bruce Williamson wrote :

What a pathetic situation. The management of this company is ONLY interested in their payout period the end. I hope this crew never finds a job anywhere again

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